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Stock Markets Have a Long-Term Bullish Bias

Over the past decade, many events have impacted markets. Here are 10 that we have judiciously selected:

  • In 2007-2008 the financial crisis hit markets;
  • On May 6, 2010, the Dow Jones Industrial Average dropped more than 9% in the span of ten minutes (Flash Crash);
  • In 2010-2011, the Greek public debt crisis breaks out;
  • In 2011, several "Arab Spring" revolutionary movements emerge in countries such as Egypt, Jordan, Libya, Morocco, Tunisia and Syria;
  • Between 2013 and 2015, an Ebola outbreak kills some 11,000 people;
  • On November 13, 2015, in Paris, a series of shootings and suicide attacks left 130 dead and 413 wounded;
  • Between July 2014 and February 2016, oil prices dropped by more than 65%;
  • On June 23, 2016, the British voted in favor of withdrawing their country from the European Union (Brexit);
  • In November 2016, Donald Trump won the US presidential election;
  • In 2017, North Korea increased nuclear testing.

Relying solely on this list, which of the following two financial vehicles do you think achieved the best stock market performance during this decade?

  1. An exchange-traded fund that replicates the performance of the S&P 500, the US benchmark (passive approach)
  2. A pool of funds managed by experienced portfolio managers (active approach)

At first glance, the second option would be a logical answer. Indeed, thanks to their expertise, investment specialists surely have added value by appropriately adjusting portfolio positions according to the events mentioned above. Well, no! On the contrary, the S&P 500 has outperformed by nearly 5%, generating an average annualized return of 7.1% vs. 2.2%! Moreover, the results of this scenario are drawn from a real bet worth one million dollars, won by the famous investor Warren Buffett against Ted Seides, a former director of the investment firm Protégé Partners, who chose the portfolio managers.

How to explain such a result? According to Spencer Jakab, a Wall Street Journalist, "the illusion of knowledge" bias refers to the propensity to overestimate the quality of the information we have and our ability to interpret it. That's why, when faced with dramatic circumstances, many investors try to "outwit" stock markets by actively trading or staying on the sidelines, an inefficient yet often observed strategy among financial professionals. In this regard, a study conducted by Openfolio reveals that in 2014, teachers achieved a stock market return twice as high as that of people working in financial services!

Being optimistic is a struggle.

Éric-Emmanuel Schmitt, playwright, novelist and director

That said, we must remain optimistic. Although investors have no control over certain events such as a terrorist attack, the outcome of a presidential election or a large-scale epidemic, he must remain disciplined and patient, based on the fact that in the long term, equity markets have a bullish bias. For example, between 1926 and 2017, the average annual return of the S&P 500 was about 10%. It is therefore advisable to use a systematic investment plan; that is to say, to automatically invest the same amount of money on a regular basis in a well diversified portfolio that corresponds to our investment objectives and risk tolerance. We then reduce the consequences of behavioral biases such as the illusion of knowledge, thus improving our stock market performance.

Regardless of our opinion, we must admit that we live in a better world. Through medical, scientific and technological breakthroughs, global economic growth is robust and sustained, resulting in productivity gains and an improved quality of life. Here is an overview of the main factors that have contributed to the last 100 years of progress.

Life expectancy Upward trend x 2
Average income Upward trend x 3
Infant mortality Downward trend x 10
The cost of food Downward trend x 10
The cost of electricity Downward trend x 10
The cost of transportation Downward trend x 100
The cost of communications Downward trend x 1000

Source : Peter H. Diamandis and Steven Kotler. Abundance: The Future is Better Than You Think, Free Press, February 21 2012.

As long as we see significant advances in fields such as computing, artificial intelligence, digital medicine or synthetic biology, we can remain optimistic and stay the course!

Sources:

  • John Wasik. How Buffett Won His $1 Million Bet, Forbes, January 8 2018.
  • Peter H. Diamandis and Steven Kotler. Abundance: The Future is Better Than You Think, Free Press, February 21 2012.
  • Spencer Jakab. Heads I Win, Tails I Win, Portfolio/Penguin, 2016.

The author

Michel Villa

Michel Villa

Speaker, stock market blogger and trading coach